Not Everything is Bad Out There
Monday, May 17, 2010 at 01:29PM While markets are currently fixated on the economic troubles in the Euro region and its potential to derail the US economic recovery, not everything is negative. For starters, mortgage rates continue to decline giving investors another 'last chance' to lock in a mortgage at low rates. Last week, we noted that the national average for a 30-year mortgage was down to 5.0%. As of Friday, that rate continued to decline, finishing off the week at 4.97%. Lower interest rates equals more money in consumers' pockets.
In addition to lower borrowing costs, consumers are also poised to see lower prices in their daily purchases of food and energy. With the exception of gold, nearly every commodity has been falling in price as the dollar has rallied. In the chart below we have calculated the cumulative daily price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) since the beginning of 2008. We then multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers' wallets over the last two years. When the line is in the green zone, changes in commodity prices are acting as a tax on consumers, while levels in the red region are considered a windfall.
As shown in the chart, since its low in March 2009, rising commodity prices were slowly eating away at the windfall consumers had built up from the downturn in commodities from their 2008 highs. In the last several days, however, that trend has reversed, and the windfall to the consumer has improved to $2.50 per person per day. So lower commodity prices should ultimately make wallets a little fatter.
The double whammy of positive trends is also coming at the same time that the US job market is improving. Sure, employment hasn't seen the type of rebound that anyone would consider strong, but it is trending upward. Combining these three things together gives us a scenario where Americans are spending less on housing, less on food and energy, and less time looking for work and more time working.
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Reader Comments (5)
For me, monthly health insurance cost increases have more than offset any savings from commodities prices. Plus, the financial incompetence of the leaders in my state of Illinois is certainly having a negative wealth affect on my financial planning. My expectations are that the union pockets will continue to be stacked while our already high taxes will continue to rise leading me to be bearish on my future disposable income and personal spending rates.
It's nice to hear some bits of good news in what has been some pretty difficult times. Of course, the snag is whether these small steps of progress will spur larger success or just get washed back. Being involved in <A HREF="http://www.wealthadvocacypartners.com/">investment management in Baltimore</A>, it's a fine line to watch.
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